In 1997, when I first came to the NYSE, there were 5,000 people on the floor of the New York Stock Exchange — today there are about 450. That is directly due to technology.
This illustrates an important point about the BlackRock story today: there is a technological arms racing going on between asset managers, and the average investor is the beneficiary.
At the NYSE and other trading platforms, it was about the ability to create computer programs that were able to trade stocks at intervals far faster than humans could do so.
For BlackRock and other asset managers, it's about the ability to create computer programs out of decades-old investment methodologies. Call it value investing, or growth investing, or momentum investing, whatever: thanks to advances in big data analytics and machine learning these investment styles can be put into algorithms.
And just like a lot of the NYSE traders have gone away, so a lot of the active managers are going away.
That's what will likely happen to actively managed stock pickers. In ten years, they won't be gone, but there will be fewer of them around.
All asset management firms that have any kind of active management have suffered from the inability to outperform the market. As a result, money has flowed from more expensive actively managed funds to less expensive passively managed funds, and more generally from mutual funds to Exchange-Traded Funds (ETFs), which for the most part are passively managed.
BlackRock is just acknowledging this reality, along with the reality that technology is a very important tool for investment selection.
The problem, of course, is that these actively managed funds generate big fees, so this trend has been a problem for firms that are associated with active management. The stocks of these companies have suffered this year:
Asset managers in 2017
Waddel & Reed down 13.0%
Piper Jaffray down 12.7%
T. Rowe Price down 9.1%
Federated Investors down 8.1%
Janus down 2.6%
BlackRock is flat because it has iShares, the number one ETF family, and is rapidly growing assets. iShares is basically a passive franchise: only a small percent of its assets under management are actively managed.
There is a whole subclass of quantitatively managed ETFs out there now. You can call it "smart beta" if you want to, but they all use rules-based methods.
This is just the application of decades-old methodologies that are being spun into computer algorithms. Legendary investors like Bill Miller at Legg Mason always insisted that they were successful because they weighed information differently than others. Maybe. But at heart, a Bill Miller was a "value" investor who used a combination of fundamentals, management insights, and capital allocation to come to a conclusion on what a company was worth.
All of these metrics can now be computerized and placed in an algorithm.